AI Infrastructure Expansion Fuels Growth Amid Market Risks And Analysts' Concerns

Key Takeaways

• DigitalBridge's focus on AI infrastructure for data centers positions it for revenue growth and improved net margins through high demand for AI-powered capacities.
  
• Expanding its digital infrastructure assets, including fiber and cell towers, grants DigitalBridge a competitive edge in the AI economy, enhancing diverse revenue sources.
  
• Rapid data center expansion, global economic shifts, and increasing competition in AI infrastructure could significantly impact revenues, margins, and strategic growth.

Catalysts

DigitalBridge is an infrastructure investment firm specializing in digital infrastructure assets.

• Through capital formation linked to the AI infrastructure ecosystem, DigitalBridge is well-positioned to significantly grow its management fee revenues and fee-related earnings as it leverages the increasing demand for AI-powered data center capacities, which will impact revenue growth and net margins.
  
• The company's strategic focus on diversifying its global data center footprint, especially in AI workloads, positions it to capitalize on the rapid expansion and demand within the generative AI sector, directly influencing top-line growth through new capital deployment in high-growth areas.
  
• DigitalBridge's expansive approach towards AI infrastructure, not just limited to data centers but also encompassing fiber, cell towers, and small cells, enables the company to gain a competitive edge in the emerging AI economy, potentially enhancing revenue from a variety of digital infrastructure assets.
  
• The formation of $3.4 billion in new Capital Management (CM) indicates a strong capital formation capacity, aligned with annual fundraising goals, which is crucial for future growth in fee-generating equity under management (FEEUM), likely leading to increased fee-related earnings.
  
• Strategic M&A opportunities and new product launches in digital infrastructure aim to further expand DigitalBridge's asset management scope, dedicated to generating higher management fees and carried interest, thus impacting future earnings positively.

Assumptions

• Analysts are assuming DigitalBridge Group's revenue will decrease by -21.7% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 49.0% today to 15.8% in 3 years time.
• Analysts expect earnings to reach $80.7 million (and earnings per share of $0.3) by about October 2027, down from $521.4 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $167.3 million in earnings, and the most bearish expecting $21.2 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 78.5x on those 2027 earnings, up from 5.5x today. This future PE is greater than the current PE for the US Capital Markets industry at 23.2x.
• Analysts expect the number of shares outstanding to grow by 13.36% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 6.79%, as per the Simply Wall St company report.

Risks

• Concerns about potential overbuilding in the data center market could lead to excess capacity, ultimately pressuring revenues and margins if demand doesn't keep pace with the rapid expansion mentioned.
  
• The global economic conditions and interest rates could pose a risk to fundraising and capital formation efforts, potentially impacting planned investments and the ability to meet financial targets related to revenue and earnings growth.
  
• Competition in the AI infrastructure space is intensifying, which could challenge the company's ability to maintain its market-leading position, potentially affecting management fee revenues and margins.
  
• Dependence on the AI infrastructure for growth might expose the company to sector-specific risks such as shifts in technology or regulations, which could impact earnings and fee-related revenues if demand for AI infrastructure investment slows down more than anticipated.
  
• The execution of strategic M&A as part of growth strategy carries inherent risks of integration and valuation, which could affect the company's balance sheet and liquidity position, impacting net margins if not managed effectively.

Valuation

• The analysts have a consensus price target of $19.19 for DigitalBridge Group based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $24.0, and the most bearish reporting a price target of just $16.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $511.0 million, earnings will come to $80.7 million, and it would be trading on a PE ratio of 78.5x, assuming you use a discount rate of 6.8%.
• Given the current share price of $16.39, the analyst's price target of $19.19 is 14.6% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.